Siemens AG Scandal Siemens AG Had Over

Siemens AG Scandal

Siemens AG had over one hundred fifty years of experience making business deals internationally by the time it became embroiled in several bribery scandals in 2006. Beginning in the mid-1800s, the company set up products such as telegraph networks and maintenance and initiated business practices such as fixed-hour workdays and employee career training that helped it get ahead. With a long and solid history as a leading company in Germany and internationally, the accusations against it might seem surprising, but investigators turned up plenty of evidence that Siemens AG had made frequent bribes of foreign officials and businessmen in order to turn business its way. It was also accused of embezzlement and tax evasion. The resulting scandal, which involved authorities in Germany, Switzerland, Greece, the U.S., and other countries, cost Siemens billions of dollars, landed some managers in legal trouble, and harmed Siemens AG's reputation. The Siemens bribery scandal is a good illustration of the long-term dangers of engaging in unethical behavior in order to gain the short-term profit.

The roots of the Siemens bribery scandal are easy to determine. In the global marketplace, international companies must compete for contracts in foreign countries, and in many of these countries, bribery is a common fact of life. In many markets, particularly in developing nations, it is common for businesspeople to curry favors from local businesspeople or government officials by giving gifts, sponsoring exotic lifestyles or entertainment, or simply giving monetary bribes. Individuals engaged in business in such an environment may feel that the only way to succeed in winning business contracts is to engage in the same unethical behavior and corruption they see modeled all around them. Managers may be encouraged to turn a blind eye to the unethical behavior of their subordinates because they are aware of the corruption businesspeople face, and because engaging in the same unethical behavior as other companies wins business.

Investigations suggest that Siemens AG managers and executives overlooked a great deal of unethical behavior within their company. Reports surfaced as early as 2004 of bank accounts owned by Siemens AG employees being investigated or seized by authorities, yet the company didn't seek to make its own investigation until much later, after German authorities launched the first of several major investigations in 2006. Siemens AG CEO Klaus Kleinfeld was one of several mangers forced out of the company as a result of the bribery and other ethical scandals that hit the company in 2006. Kleinfeld resigned as CEO in July, 2007, after two years in the CEO position. He was replaced by an executive formerly with Merck & Co, the first time Siemens gained a CEO from outside the company. Because Kleinfeld was not implicated in the scandals, and because he had taken over the CEO job only in 2005, some analysts thought his forced resignation was unnecessary and might actually be detrimental to the company's recovery (Deresky, 2010, p67) .

It could be viewed that Kleinfeld was too busy focusing on his aggressive plans to change the company to pause to reflect on what isolated accusations of embezzlement or bribery might mean on a larger scale within the company. And while turning a blind eye to potential legal and ethical problems within the company may have allowed it to escape trouble in the short-term, his disinterest in delving further into potential problems surely cost the company a great deal. Because Kleinfeld, like other managers within the company, had the resources and means to investigate early on but did not do so, it can easily be argued that Kleinfeld was irresponsible to the company he was tasked with running. His successes were diminished by the scandal when he had the power to root out corruption and protect his company from legal and financial damage. Had he chosen to have accusations of dishonesty and unethical behavior against individuals and units investigated, he might have been able to proactively mitigate the resulting scandal, reduce the financial impact, and salvage the company's reputation for honesty. Kleinfeld is just one of many managers and executives within Siemens AG who seemed bent on ignoring unethical behavior within the company, but as CEO, he was ultimately responsible for the failure of anyone to investigate corruption. A large number of other managers and executives likely shared part of the responsibility, because many people were in the position to act, but failed to do so, which shows that the unethical problems within Siemens AG were systematic, possibly even the norm for the company at that time.

As a result of the scandals and their effects on the company, a number of investigations were launched, and new policies put in place to attempt to curb corrupt behavior. An independent company was hired to help existing auditors review the company's compliance and control safeguards, an area which had clearly failed in its duties of ensuring that laws were adhered to. Siemens hired a head compliance advisor from an outside agency, appointed a legal expert to head a Compliance Office, and set up a Compliance Task Force. It issued notices to company managers and employees instructing them on how to deal with government officials, and the CEO at the time, Kleinfeld, publically stated that the company would have zero tolerance for corruption by its employees. In 2007, Kleinfeld was forced out of the company and replaced by the first CEO recruited from outside the company in what was stated to be an attempt to bring a fresh perspective to the company. The new CEO, Loescher, was tasked with not only taking in hand a company beset with scandal, plagued by fines and fees, and haunted by accusations of embezzlement and tax evasion, but also with developing the trust of people within Siemens AG and others within the business community where it operated. He applied the "zero tolerance" policy more broadly than Kleinfeld had, and in March 2008, the company charged 500 employees with violating its compliance standards. Further, in 2008 he stated that he planned to lead a "cultural revolution" within the company, which would take several years. (Deresky, 2020, p 69).

A change in company culture was certainly a necessity in view of the widespread corruption apparently plaguing Siemens AG. Any company that allows corruption to exist throughout its levels must surely have a company culture in which pervasive corruption is met with no more than a nod and a wink. This culture, should it be allowed to continue, could easily lead to employees falling into old patterns of behavior that allow unethical behavior. Siemens AG ended up dismissing about 150 of the employees it had charged with violating company rules, while the rest of the 500 investigated were reprimanded or penalized in other ways. These results could lead one to question the seriousness of the "zero tolerance" policy, since reprimands may not actually seriously affect the future behavior of employees and may not remove them from positions in which they could allow unethical behavior in the future. Indeed, allowing a manager who ignored unethical behavior to retain a position of leadership could work against the creation of a new company culture, because management expectations play heavily into the actions of employees they supervise. Siemens AG might have shown its seriousness by dismissing all employees involved in corrupt behavior, either directly or by allowing it continue under their watch.

Bribery and other forms of preference-garnering don't always succeed, which makes them not only unethical, but potentially ineffective. In his article "Guanxi Networks in China," Professor Vanhonacker recounted the tale of a company that had hired the relative of a Chinese ministry official as a local representative in hopes of securing business through the relative's connections. Instead, the company wasn't chosen for lucrative contracts because the ministry feared accusations of favoritism (Vanhonacker, 2004, p 48-49). Hiring a person for his connections, like bribery, can only work if the other business entity values the relationship enough to risk legal trouble or reputations. There's always the chance, too, that a competing company might have given a better bribe of hired someone with a better connection, in which case the first company's efforts were in vain. Even if paying bribes appears to be the standard within a certain country, it is never a good idea to blindly follow the corrupt behavior of other companies. Relative conditions within one area of business should not cause a company to sacrifice its norms of behavior and practice. Engaging in unethical behavior tarnishes the reputation of each individual separately, and brings risks to the individual and the company the individual works for.

Unethical behavior also opens companies and individuals up to scandal in other ways. For example, using bribery or favors to win a contract might obligate one to grant favors in return. Exchanging gifts, money, or favored treatment can open a company or individual up to being in the debt of another company or person. If obligations aren't reciprocated, the failure to reciprocate could ruin the chance for further business deals, or even result in the spurned party taking revenge in some way. A person who felt their favors weren't being returned could trade their inside knowledge of unethical practices for freedom from prosecution and ensnare the given in legal trouble. Alternately, if an individual or company attempted to bribe someone with high standards of ethics, that person might opt to turn the individual offering a bribe in just out of idealism. It is always risky to engage in corrupt behavior because it not only opens the individual and company up the possibility of prosecution, financial repercussions, and lose of prestige. Siemens AG engaged in such unethical practices and lost out when it was caught red-handed. Minimizing the likelihood of future corruption by creating strong regulations and changing its corporate culture could help Siemens regain a reputation as a leader in corporate honestly, which would make it a more attractive business partner to companies who seek to practice honesty and avoid trouble for themselves.

Around the same time that Siemens AG was embroiled in scandal, several other tops German companies, including Volkswagon and Deutsche Telekom, faced investigations into similar problems. Individuals high up within the companies were implicated in bribery scandals for actions within Germany or internationally. Siemens AG claimed that such corruption was initiated by individual employees and never received management approval of any kind. The company admitted only to having poor internal regulation and promised to improve. And yet, investigations show that it systemically paid our bribes to win international contracts, especially in countries where bribery was a common business practice. Experts say that it was clear that "a system of bribery was installed" at the company (Deresky, 2010, p70) and such a frequent practice should not have been ignored by the company's board. Attempting to shift the blame from management and the board onto individuals within the company may have prevented some executives from shouldering their share of the blame, but it did not prove that Siemens AG wasn't fully responsible for the scandals that befell the company. The company executives and managers should all have been fully aware that bribery was not legal for a German company, even when operating in foreign territory where loose laws or poor enforcement made such practices common. It engaged in risky practices and while it may have been somewhat unlucky to have garnered so much attention from investigators, compared to other companies that might have had comparable practices, it was certainly at fault for allowing unethical practices to become a routine part of its international business operations.

While some individual employees were prosecuted by authorities, and others dismissed from the company after internal investigations, Siemens as a company was merely fined and forced to pay out monetarily as a result of the scandal. The fines, back taxes, and late interest charges amounted to billions of dollars, and caused the company to downgrade its earnings reports fractionally. Yet, the people ultimately in charge of the company faced little in the way of personal loss. Top managers and executives were not fined and did not have to pay back taxes. They were not jailed, and few lost their jobs. The image of CEOs being paid and given bonuses even in the face of wrongdoing and failure of the companies they lead has played out dozens or hundreds of times. Even after the United States government bailed out failed companies like AIG in the wake of the U.S. housing market crash, the failed, bailed-out companies continued to pay enormous salaries and bonuses. Forbes magazine stated in 2009 that AIG received $173 billion from the U.S. government to save the company, and shortly thereafter paid out $165 million in bonuses to company executives -- despite the fact that they'd failed to create a successful company (Kaylan, 2009, para 2).